July 2011
Intermediate to advanced
741 pages
17h 32m
English
book
Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide
by R. Venkata Subramani
Content preview from Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide
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ACCOUNTING FOR INTEREST RATE REVERSE COLLAR
Accounting for an interest rate reverse collar is very similar to that of accounting for a collar instrument. In the reverse collar there are two components: the cap component and the floor component. Depending upon the strike rates of cap and floor the premium is computed. In a reverse collar, if the benchmark rate is above the cap rate on the reset date, then on the pay date interest above the cap strike rate will be paid by the buyer of the reverse collar instrument to the seller. If the benchmark rate is lower than the floor rate then the seller compensates the buyer interest to that extent.
Just as in a collar instrument, in a reverse collar the premium can be either positive or zero. It can also be negative, meaning that the buyer of the reverse collar may get a premium for taking a position.
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